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Wednesday, July 13, 2011

July Newsletter - Multiplying Your Margins - A Controversial Article

How would you like to make more money from one sale than your competitors make from seven? That is what Apple does with their Mac’s.

For each Mac sold, Apple makes $370. Hewlett Packard makes just $52 from each PC it sells. HP’s selling costs for the 7 sales reduce this profit even further. Apple’s selling costs for the same margin are for just 1 sale.

Why the difference? While both companies are selling computers that do pretty much the same thing, HP’s products have to compete with all the PC clones which run the same operating systems and software. If you took the badge off the box, most people couldn’t tell if they were using an HP, Toshiba or an Acer PC.

The Mac looks very different. From the styling, the operating system and even the software. Although the software range is smaller, people still prefer it. They believe it is a superior system.

But is it? Look at what the corporate world buys. Corporates pay technical experts to undertake detailed comparisons considering all factors including capability, maintainability, and cost. They don’t consider styling. It is a technical decision. The corporate world buys PC’s.

So why are people prepared to pay a whole lot more for what is arguably a technically inferior product? Apple has convinced their market that people who buy their products are more savvy, creative, and independent minded, so when you buy one of their products, it is a way you too can demonstrate that you possess these virtues as well. Pretty cynical hey?

The whole luxury goods industry is based on the same premise, but to achieve these high margins, much effort must be spent in branding and design.

Apple invests a lot in design, far more than HP or any other PC manufacturer. PC’s are built with functionality in mind. However, design is not enough. Apple could not achieve these margins if that was the only difference. The operating system and programs are all different, so direct comparisons are not easy to make.

There is one further point. Apple makes a big play on being non-corporate in its appeal to their market. Mac buyers feel they are rebelling against the system. If you buy a PC clone, aren’t you a clone too? Who wants to be thought of as a clone?

As I said, this is a controversial article and I expect to get hate mail from Mac users, but only by challenging our prejudices do we learn.

So what are the lessons for small business? It is about being clearly different from your competitors and making your buyers feel that in choosing you, they are making a decision that bestows Kudos on the buyer which is visible to their peers. Their peers congratulate them on making such a wise buying decision.